For our Starred series we take you deep inside the inboxes of our favorite entrepreneurs. Joining us today, Aaron Levie, CEO and cofounder of Box.net.

Introducing Starred, where we take you deep inside the inboxes of our favorite CEOs, entrepreneurs, and VCs. Think that first message Jack Dorsey ever sent to Biz Stone describing his crazy idea for a 140-character blogging platform–the emails you’ve had starred in your inbox for years, saved almost solely for nostalgia. Joining us today, Aaron Levie, cofounder and CEO of Box.net:

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When we started Box in 2005 to make it easy for individuals and businesses to share information online, the competitive landscape was fairly nascent. There was a handful of “zombie” companies that had barely survived the dot-com bubble, but they weren’t adequately serving their customers. We figured that there had to be a much simpler and more “modern” way people could share data online, securely. After we launched, Box experienced rather frictionless growth during its first few quarters, fueled by a pay-only business model–the only way we knew how to support operations (I know, how quaint).

But later in 2005 and early into 2006, it became clear that “cloud storage” would be a critical market for players like Microsoft, Google, and Apple. Rumors around the ill-fated “Gdrive” project were swirling, and we worried about the destiny of our pay-only offering in a landscape of subsidized services from better-known brands. Further, our growth was somewhat limited by the hurdle of individual consumers having to pay for an online service (still a rarity at the time). Our solution? Create a free product with one gigabyte of free online storage space, with the option to upgrade from more functionality and storage. Upon launching the free version in 2006, we immediately started seeing tens of thousands–even hundreds of thousands–of signups per month. We were certain we’d stumbled onto a major success, but some of our early investors thought otherwise, as this approach would require taking on more capital to sustain operations. I’m pretty sure something about Pets.com not succeeding was referenced.

We reached a critical juncture where we either had to commit fully to freemium, possibly losing our initial investors in the process, or revert to our original, more conservative approach, as outlined in the 2006 email below to an investor who wasn’t on board with our new direction.

We ultimately chose to go forward with our freemium model, raising money from Draper Fisher Jurvetson and eventually focusing on the enterprise. It was a pivotal and risky decision, as we would have to support a substantial user base that wasn’t paying us upfront–generally a no-no in software–but ultimately, it proved to be the right move. While some of our predictions were wrong at the time, such as Microsoft becoming the Walmart of this space (side note: That was a wacky analogy, and we no longer refer to Box as a “country store”), our freemium product strategy has since allowed us to gain a foothold into 100,000 businesses, including 77% of the Fortune 500. We wouldn’t be working with the likes of Procter & Gamble, Dell, Panasonic, Linkedin, Pandora, or others if we hadn’t. Good times.

Hello [redacted],

My fear is that people aren’t going to have to pay for this soon.

When Microsoft and Google come in to the space, they’re going to be giving away storage for free. Unlimited space? Maybe not. But 5 GB? Very reasonable. The thing is, it’s going to be a Microsoft vs. Google battle. Box isn’t even in the picture. We get squeezed as the two giants tangle. They can afford to subsidize storage to get users on their platform.

And there’s no barrier with features. Google can develop sync features (they’d be crazy not to). And Microsoft’s pushing for small businesses, so if they don’t have workgroup features, they missed the mark. Google and Microsoft can have 10 developers working day in and day out to add features.

So if we can’t compete on price… and our best features can be remade in one month of development, then we’re in a suicide industry. We can’t develop barriers comprehensive enough to sustain new growth. Even if we have a small, loyal user base, it will remain a small, loyal user base.

That’s why I think we need to adjust our game plan. It’s like a family owned country store when a Walmart is moving in. You like the owners and you know them. A percent of your base stays. But some start shopping at Walmart and new shoppers have little reason to go with you.

So we’re playing with ideas to find out how we can differentiate ourselves and keep growing. We can’t keep our country store just a country store.